September 24, 2007

GURGAON, India -- Don Price got his start in the cellphone industry in the 1980s installing clunky phones in luxury cars in Orlando, Fla. Today, most of his millions of prospective customers don't have cars, regular electricity or even running water.

The 44-year-old former Navy technician is the director of networks for India's largest cellular company, Bharti Airtel Ltd., which is trying to blanket this hot, mostly poor country with radio towers. Mr. Price spends his time directing experiments with cold-gel packs and solar panels in an effort to solve a puzzle: How to make service cheap enough for the rural poor, yet profitable? "When you look at cost, it is really a challenge," he says.

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Eric Bellman

In July, Bharti Airtel commissioned one of its newest towers in a village 300 miles from Mumbai. To let the villagers know service had arrived, Bharti staged a traditional dance performance next to the new tower.

Cellular providers initially tapped developed markets, and when those were saturated, big cities and suburbs in the developing world provided easy growth. But to expand further, cellular companies want to reach hundreds of millions more potential customers who live outside the main population centers.

Almost two billion new subscribers are projected to start using mobile phones in the next five years, and 80% of them live in developing-world markets, according to estimates by Sweden's Telefon AB L.M. Ericsson. In India alone, more than seven million new cellphone subscribers recently have been signing up each month, bringing the total close to 200 million subscribers in a country of 1.1 billion.

The economics of that growth get dicey. Indian cellular companies charge less than two cents a minute, among the lowest rates in the world, and the average bill is under $10 a month compared with about $50 in the U.S. The more that cellular companies penetrate India's rural areas, the higher the costs to set up and maintain networks. Yet rural customers, living on an average of less than $2 a day, tend to spend even less on phone service than their wealthier urban counterparts. Only companies that can cut costs while expanding their networks can profitably pursue the untapped market.

India, with most of its people living in villages in the countryside, has become a laboratory for how to make networks work cheaply in areas where hot climates and unreliable electricity drive up costs. As companies figure it out here, their successful experiments are being exported to other developing regions including Africa and Southeast Asia.

The Finnish-German joint venture Nokia Siemens Networks is testing new, small antennae that can be stuck to the roof of a hut to bring service to a tiny village. India's Essar group is experimenting with liquefied petroleum gas to replace more expensive diesel fuel to run backup generators. Ericsson and India's Idea Cellular Ltd. are jointly testing some unusual alternative fuels: They have abandoned the idea of using methane "biogas" generated in pits of cow dung and water, and are experimenting with using waste oil from deep fryers at restaurants.

At Bharti, Mr. Price says he has trimmed the cost of running its towers by 10% a year since he joined the company in 2002. Company officials declined to discuss figures but said he had achieved a "healthy reduction." That's made it commercially viable for Bharti to add 20,000 towers in the next six months to the 50,000 it operates. Bharti's competitors are also expanding rapidly. In the U.S., companies need far fewer towers because they operate a more effective frequency that in much of India is reserved for the military. T-Mobile U.S.A. Inc. has 36,700 towers, for instance, and Verizon Wireless only 25,000.

Even more Bharti towers are on the way. "We are trying to get deeper and deeper into India, but we have a long way to go," Mr. Price says in an interview at Bharti headquarters in a suburb of New Delhi. "We will have 70,000 sites by March 2008, but a couple hundred thousand is what we need."

Already, Bharti is reaching customers whom it didn't consider worth pursuing not long ago. In July, Bharti commissioned one of its newest towers in the sleepy village of Madilage, about 300 miles south of Mumbai. To let the villagers know cellular service had arrived, Bharti staged a traditional dance performance on the back of a truck parked under the new tower. About 500 villagers -- a fifth of the local population -- gathered to watch the show and learn how cellphones work. "Incoming calls are totally free!" announced the Bharti emcee.

Peanut farmer Sandeep Pati, 23 years old, is one of the first subscribers in Madilage, but his investment -- he says he spends less than $20 a month on calls -- is already paying off. He rents out his tractors to other farmers and his cellphone means he can arrange more rentals quickly with less downtime. "I can run my business even from the field," says Mr. Pati outside his simple home, where his water buffaloes sleep on the ground floor below his bedroom. "When I had problems with the tractors before, we would just have to leave it where it was for a day, now I can call and get it fixed right away."

Mr. Price, who grew up in Portland, Ore., entered the telecommunications business almost by accident. After his stint in the Navy where he got a crash course in electrical engineering and communications equipment, he went to work in his family's import car business in Orlando. He got hired by McCaw Cellular Communications to help install car phones, then after more training he helped McCaw set up its first towers around Orlando and was gradually promoted to help build new networks across the U.S. After McCaw was sold to AT&T in 1994, Mr. Price stayed with company founder Craig McCaw's new company, McCaw International, and built networks in China, Indonesia and the Philippines.

Mr. Price was back in the U.S. working as a technical supervisor at McCaw company Nextel Partners Inc., (since acquired by Sprint Nextel Corp.), in Pensacola, Fla., when Bharti's chairman, Sunil Bharti Mittal, asked him to come to India to be his networks director in 2001. Mr. Mittal -- who now plans to build a big Indian retail company with the help of Wal-Mart Stores Inc. -- had been scouting Mr. Price for years because of his experience setting up networks in developing markets.

He knew he enjoyed living abroad, but he wasn't sure if he was ready for India, with its power interruptions and cows roaming the streets. Mr. Mittal sent him plane tickets to come to New Delhi for a weekend to get a better feel for India and the company's big plans for its cellular business, which then had less than a million customers. Mr. Price was impressed, but says it was the 18-hole Arnold Palmer Signature golf course near Bharti's office that convinced him to take the job.

Mr. Price's arrival in 2002 coincided with increasing competition in India's cellular industry, as the government eased restrictions on entry into the business. Newcomers -- including one of India's largest conglomerates, Reliance Group -- launched national networks and slashed rates to capture customers.

At a meeting in a hotel near the Taj Mahal that year, Bharti's managers realized they couldn't outspend their new competitors or afford to sell their service at a loss for very long. They decided to cut operating costs to try to maintain profit margins even as rates slid. Rivals also had to look for new ways to cut costs to survive.

Mr. Price focused on transmission towers, the backbone of every cellular network. In India, they usually stand 130 feet high; one tower is needed to provide a signal for an area ranging from three to nine miles in radius depending on the equipment and terrain.

Electrical equipment at the base of the towers needs power as well as air conditioning to operate in India's extreme heat, and India's frequent power outages mean the towers need backup generators as well. "We had to budget for eight hours a day on generators," says Mr. Price. "That was a killer." Running them on diesel is expensive and the valuable fuel is often pilfered.

Mr. Price's managers suggested installing big backup batteries to last through power outages and using stacks of chemical-gel cooling packs to replace electric-powered air conditioning. An Indian company, Acme Tele Power Ltd., helped Bharti develop both, and now is making the parts in China and exporting the technology to Sri Lanka, Tanzania, Indonesia and Kenya. Mr. Price also persuaded Bharti's suppliers to shrink their equipment so it requires less power, and is experimenting with solar and wind energy.

The cost of building and equipping a Bharti tower has dropped around 40% to $75,000, while the time the average rural site runs on diesel generators has been slashed to four hours a day from eight, Mr. Price says.

Bharti has survived the competition and emerged as India's largest cellular operator by number of subscribers, now 47 million, and a 28% share of the market. In the year ended March 31, earnings jumped 89% to $1.06 billion, as its net profit margin rose to 23.0% from 19.4% a year earlier.

Its Indian rivals are innovating as well. Essar Telecom Infrastructure Ltd., which manages towers for cellular provider Vodafone Essar Ltd. and others, is building towers with lighter steel and more efficient designs to reduce construction costs. It's also working on running its towers on liquefied petroleum gas, which is cheaper than diesel.

Reliance Communications Ltd. plans its own massive tower rollout this year. It is using factories in China to build easy-to-assemble tower kits for export to India to double its coverage. Companies in India are also beginning to explore ways to share their infrastructure to cut costs, as cellular operators regularly do in developed markets. Now, there are as many as four towers in one spot. Ericsson also has developed what it calls "expanders" to extend the coverage of each tower antenna by 30%. The technology, partly developed in India, is now being used in Nigeria and Bangladesh.

Mr. Price and other executives in the Indian cellphone industry say they have been consistently surprised by the pent-up demand for phone service in the country's hinterland. Often, when Bharti's new towers go into operation, the added capacity is quickly overwhelmed with new users.

Mr. Price points to the state of Bihar -- one of India's poorest regions, where half the population of around 90 million lives below the poverty line -- as one of Bharti's fastest growth areas. "In the whole state of Bihar we cannot put in the sites fast enough," he says. "It is rocking. It is just rocking."

Such success is gratifying for Mr. Price, who got a taste for the rough side of expatriate life when he first arrived in India. With regular blackouts in his apartment and such persistent stomach problems that he lost 40 pounds, he didn't know if he could see out his first two-year contract. "My best friend was the gastroenterologist," he recalls.

Now, Mr. Price spends long weekends every other month on his 43-foot yacht off the coast of Thailand. He says he has no plans to leave India anytime soon.